Slamming the door on the Big Four

The State Council Legislative Affairs Office of the PRC has
requested public comments on proposed amendments to the CPA Act. The very act of asking for public comments on
legislation reminds me how much things have changed in my 15 years living in
China.

The legislation appears to be mostly housekeeping. There is
no new policy here, just alignment of existing laws with policy. The most important change is getting rid of
all the language about joint venture accounting firms. Instead, accounting firms are required to use
either general or limited partnerships, with limited partnerships available
only to firms with at least 25 partners and 100 CPAs.

China faced three problems with CPA firms since they first
reappeared in 1980. First, all CPA firms were initially affiliated with the
state. Of course, in 1980, everything
was affiliated with the state. The need for
an independent CPA profession was recognized as China’s economy developed, and
by the late 1990s all CPA firms were separated from the state. Second, the original CPA law allowed firms to
organize as either partnerships or corporations, yet partnerships were unknown
in China and it was near impossible to form one. As a consequence, nearly all CPA firms were
organized as corporations. That tended to concentrate ownership and management
in a single individual, which was considered a poor governance structure for
professional accounting firms. The government has been pushing partnerships
since the 1990s, and soon it will be the only form available for CPA firms.

The third problem was joint venture accounting firms. China
allowed the then Big Six to form joint venture accounting firms in 1992. Three second-tier firms were later allowed to
form joint ventures, but all of those ventures failed because of conflicts between
the partners. PwC formed a new joint
venture in 1997 at the time of the merger of PW and C&L. Since then, no joint venture firms have been
allowed. The existing joint ventures
were allowed to continue because of a special provision in China’s WTO
accession. Three of the JV’s expire this
year, having used up their 20-year lives, with PwC getting an extra five years.
This legislation slams the door on any hope the firms had of extending the
joint ventures. They will be required to restructure into limited partnerships
owned by Chinese CPAs – and fast. China has graciously said it will follow its
WTO commitments, which expire as the joint ventures expire.

The changes will bring China in line with international
practice. I am not aware of any other
jurisdiction that allows unlicensed persons to own a CPA firm. This will bring pain to many Big Four
partners, who must obtain a Chinese CPA license or lose their right to
ownership.